Chapter 1: Preliminaries

Multiple Choice

Which of the following topics would most likely be studied in a Microeconomics course?

The correct answer: The rate of change in the price of long distance telephone service.

This price is determined by buyers and sellers interacting in a market.

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Which of the following topics would least likely be studied in a Microeconomics class?

The correct answer:: The wages of all workers in the nation.

This is determined by individual agents acting in a single market.

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Which of the following statements is a normative statement?

The correct answer: The minimum wage is too low.

This statement makes no judgement about the minimum wage. The statement is simply a point of fact.

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Which one of the following statements is the result of positive analysis?

The correct answer: Families with high incomes tend to purchase larger homes than families with lower incomes.

The statement describes what the speaker thinks "ought to be."

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Suppose that vendors sell pretzels outside the football stadium for 50 cents each while pretzels sell for $2 each inside the stadium during a game. Arbitrage would involve

The correct answer: buying pretzels outside the stadium and selling them inside the stadium.

Arbitrage would be buying pretzels outside for 50 cents and reselling inside for $2.

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The difference between the market for automobiles and the automobile industry is that the market consists of all buyers and sellers while the industry consists of

The correct answer: only the sellers of automobiles.

The market is where buyers and sellers come together. The industry is the collection of all sellers of a similar product.

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In defining the geographic extent of the local market for home heating oil, economists need to consider all of the following EXCEPT

The correct answer: the price of unrefined crude oil.

This would limit the extent to which a supplier could expand its market.

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If the price of home heating oil is 20 cents per gallon higher in Leesville than in Culpsville for the entire heating season, one can conclude that

The correct answer: the two towns are not part of the same market for home heating oil.

If arbitrage were taking place, the price gap would eventually disappear.

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Pepsi and Coke can be considered to be selling in the same market UNLESS

The correct answer: buyers of one brand would never consider buying the other brand under any circumstances.

The two brands could be in the same market, and yet, due to product differences, they would sell at different prices.

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If the nominal price of gasoline rises more than the nominal prices of all other goods and services, then

The correct answer:: the real price of gasoline definitely increases.

Since the real price is the nominal price divided by the price index, the real price will increase.

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If the nominal price of gasoline rises, then

The correct answer: the change in the real price of gasoline cannot be determined without further information.

Since the real price is the nominal price divided by the price index, we need to know the change in the price index to know the change in the real price.

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If the nominal price of gasoline is unchanged while the nominal prices of all other goods and services fall, then

The correct answer:: the real price of gasoline definitely increases.

Since the real price is the nominal price divided by the price index, the real price will increase.

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If you know that the real price of gasoline fell during a particular time period, then it must be true that

The correct answer: if the nominal price of gasoline rose, the CPI rose by a greater percentage.

Since the real price is the nominal price divided by the price index, if the real price were to fall, then either the nominal price fell while the CPI either rose or fell by a lesser percentage, or the nominal price rose and the CPI rose by a greater percentage.

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The price of basic cable television service increased from $15 per month in 1983 to $35 per month in 1999. During this same time period, the CPI rose 70%. The real price of cable television service

The correct answer:: increased.

The nominal price increased by (35-15)/15 = 133%. Since this increase is greater than the overall increase in prices, the real price of cable TV increased.

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In 1983, Professor James was hired at an annual salary of $25,000. In 1999, his annual salary is $50,000. Based on a 1999 CPI of 170 (1983=100), the professor's real salary has

The correct answer: increased by almost 20%.

His real 1999 income in 1983 $ is $50,000/1.7 = $29,411. This represents a (29,411 – 25000)/25000 = 17% increase.

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In 1996, George earned an hourly wage of $12. In 1999, George earned an hourly wage of $12.91. Based on a CPI of 158 for 1996 and a CPI of 170 for 1999 (1983=100), the change in George's real hourly wage

The correct answer: was zero from 1996 to 1999.

In 1983 $, his 1996 wage was $12/1.58 = 7.59. In 1983 $, his 1999 wage is $12.91/1.70 =7.59. There is no change in his real wage.

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The Clevons Corporation has a goal of setting the nominal price of its product in such a way as to keep the real price the same as it was when the company started in 1970. In 1970, the company charged $1.00 each for its product and the CPI was 38.8 (1983=100). If the CPI in 1999 was 170, then the price of the product in 1999 should have been

The correct answer:: $4.38.

In 1970, the price in 1983 $ was 1/.388 = 2.58. To keep a real price 2.58 in 1999, the price would be 2.58 * 1.7 = 4.38.

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In 1996, George earned an hourly wage of $10. In 1999, George earned an hourly wage of $15. Based on a CPI of 158 for 1996 and a CPI of 170 for 1999 (1983=100), George's real wage in 1999, in 1996 $ is

The correct answer: $13.94.

Since 1996 prices are 1.58 times greater than 1983 prices, first compute the 1999 wage in 1983 $, then multiply it by 1.58. Real wage = (15/1.70) * 1.58=13.94.

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In 1930, Adam would spend 10 cents for a ticket to go to the movies. Today, a ticket to the movies costs $4. Adam feels that he is paying too much at the movies. You could console him that the real price of a movie ticket is not higher now than it was in 1930 as long as

The correct answer: the CPI increased by more than 3,900% since 1930.

The increase in the price of the movie ticket is (4-0.1)/0.1 = 3,900%.

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In 1983, Pete purchased a 13" television set for $150. In 1999, a 13" television set could be purchased for $75. Knowing that the 1999 CPI is greater than 100 and the CPI equals 100 for 1983, one can conclude that the change in the real price of the 13" television is

The correct answer:: negative.

Since the real price is the nominal price divided by the price index, a drop in the nominal price combined with an increase in the CPI means the real price decreases.

Chapter 2 : The Basics of Supply and Demand

Multiple Choice

A rightward shift of the demand curve for computer programmers will result in a

The correct answer: movement along the supply curve for computer programmers and a shift in the supply curve for computer programs.

The new equilibrium is at a higher price as one moves up the supply curve. Programmers now receive a higher "price" for their services. Since programmers are inputs into making programs, the supply curve for programs shifts leftward.

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As the price of oranges rises,

The correct answer: the quantity demanded for oranges decreases.

Price and quantity demanded are inversely related. The change in price results in a movement along the curve – not a shift.

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As the price of oranges rises,

The correct answer: the demand curve for grapefruit shifts to the right.

A rise in the price of orange juice causes a decrease in the quantity demanded of orange juice and a rightward shift in the demand curves of substitutes such as grapefruit.

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As the price of oranges rises,

The correct answer: the supply curve for orange juice shifts to the left.

A rise in the price of an input causes a leftward shift in the supply of a good.

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As the price of automobiles rises,

The correct answer: the demand curve for bicycles will shift to the right.

A price increase causes the quantity demanded for a good to decrease, the demand curve for substitutes to shift rightward, and the demand curve for complements to shift leftward.

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If there is a surplus in the market for gasoline, then which of the following statements is most likely to be true?

The correct answer: Gasoline prices will fall.

A surplus means that at the current price, quantity supplied exceeds quantity demanded. If that is the case, then the price must be above equilibrium price. In the absence of any government restrictions, price is expected to fall.

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If the market for bicycles is not in equilibrium, then which of the following statements is definitely true?

The correct answer: The price of bicycles will change, but not enough information is given to determine the direction of the change.

Not being in equilibrium implies that price and quantity will change. However, since one does not know from the statement whether price is above or below equilibrium, the direction of the change is unknown.

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Suppose that the market for luxury automobiles is currently in equilibrium. What effect would a sharp drop in consumers' income have in this market?

The correct answer: Both the equilibrium price and the equilibrium quantity will fall.

The drop in consumers' income will cause the demand curve for luxury automobiles to shift leftward. This will cause both price and quantity to fall.

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Which of the following factors could best explain the recent increase in the price of golf clubs?

The correct answer: The increase in the popularity of golf.

This would cause the supply curve to shift to the right, and the price would fall.

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Suppose the monthly demand for a can of 3 tennis balls at a nearby tennis club can be expressed as Q = 150 – 30P. What is the price elasticity of demand at a price (P) of $3 per can?

The correct answer: -1.5

Elasticity equals (-30)*(3/60) = -1.5.

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If the cross-price elasticity between home personal computers and video game units for tv is positive, one can conclude that

The correct answer: these products are substitutes for one another.

A positive cross-price elasticity means that the two goods are substitutes.

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Suppose that the demand for lawn fertilizer can be expressed as QD = 5000 – 120P and that the supply of lawn fertilizer can be expressed as QS = 1000 + 80P where Q is measured in thousands of tons per year and P is measured in dollars per thousand tons. What is the price elasticity of demand when the market is in equilibrium?

The correct answer: -0.92

To find equilibrium, set 5,000-120P = 1,000 + 80P. This yields P =20. Price elasticity of demand = (-120)*(20/2,600) = 24/26 =.92.

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The demand for gasoline is more price elastic in the long run than in the short run because in the long run,

The correct answer: consumers have greater ability to change the car they drive than they do in the short run.

In the short run, consumers can only change the amount that they drive. In the long run, they can purchase a different car with different fuel efficiency.

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Suppose that the market equilibrium price of corn is $1 per dozen ears and 4,000 dozen ears are sold each week. Assuming a linear demand curve for corn, if the price elasticity of demand for corn is –1, then the demand curve may be written as

The correct answer: Q = 8000 – 4000P.

Since (change in Q/change in P) * (P/Q) = -1, then (change in Q/change in P) = - 4000. Q = a – 4000P, or 4000 = a –4000(1), so a=8000. Thus, the demand curve can be written as Q = 8000 – 4000P.

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Two demand curves have been drawn to represent the demand for coffee. The two curves intersect at the current market price. One curve is steeper than the other curve. It is most likely that

The correct answer: the steeper curve represents the short-run demand for coffee while the flatter curve represents the long-run demand for coffee.

Over the short run, consumers might change their quantity demanded slightly in reaction to a price change. Over the long run, the response to a price change is change is greater as consumers adopt other beverages.

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A sharp and lasting decrease in the demand for ice cream would result in

The correct answer: a greater price decrease in the short run than in the long run.

Since the short-run supply curve is steeper, the price decrease will be greater in the short run. In the long run, producers can reduce the quantity supplied more so than in the short run. As a result, in the long run, there is a price decrease, but it is smaller than the short-run price decrease.

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If government regulators set a price ceiling on a good, the size of the shortage that results will be greatest under which of the following settings?

The correct answer: Demand and supply are both very elastic.

If demand and supply are both very elastic, the difference between quantity supplied and quantity demanded increases.

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Suppose that the demand for lawn fertilizer can be expressed as QD = 5000 – 120P and that the supply of lawn fertilizer can be expressed as QS = 1000 + 80P where Q is measured in tons per year and P is measured in dollars per ton. What is the effect of a government-imposed price ceiling of $10 per ton of fertilizer?

The correct answer: A shortage of 2,000 tons.

Equilibrium price is found by setting 5000 – 120P = 1000 + 80P, or P =$20, so the ceiling is effective. At a price of $10, quantity demanded equals 3,800 thousand tons, while quantity supplied equals 1,800 tons. Thus, a shortage of 2,000 tons is the result.

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Suppose that the demand for lawn fertilizer can be expressed as: QD = 5000 – 120P and that the supply of lawn fertilizer can be expressed as: QS = 1000 + 80P where Q is measured in thousands of tons per year and P is measured in dollars per thousand tons. If demand increases 10%, by how much will price change?

The correct answer: Price increases by $1.23.

The old price is found by setting 5000-120P = 1000 + 80P. Solving yields P =20. The new price is found by first increasing quantity demanded by 10% so that demand can be written as QD = 5500 – 132P. Then, solve 5500-132P = 1000 + 80P. The new price is $21.23.

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Suppose that 1000 gallons of ice cream sold on the boardwalk each day at a price of $1. Suppose a 10% price increase causes the quantity demanded to fall by 5%. The price elasticity of demand is equal to

The correct answer: -0.5

Price elasticity of demand equals percent change in quantity demanded divided by the percent change in price equals (-5%)/(10%) = -.5

Chapter 3 : Consumer Behavior

Multiple Choice

The indifference curves for two goods are negatively sloped because of the principle that

The correct answer: more is preferred to less.

Since along a given indifference curve, a given bundle yields just as much utility as any other bundle and more is preferred to less, then bundles with more of both goods than the original bundle cannot be on the same indifference curve as the original bundle. Bundles with less of both goods than the original bundle cannot be on the same indifference curve as the original bundle. The only bundles that can be on the same indifference curve as the original bundle are bundles that have more of one good and less of the other.

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Indifference curves cannot intersect because of the assumption that

The correct answer: preferences are transitive.

While this is true, it does not keep indifference curves from intersecting.

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Indifference curves between nickels and dimes would be

The correct answer: Negatively sloped and straight.

Two nickels are perfect substitutes for one dime. The indifference curves would therefore be straight lines with a constant slope of –2.

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Indifference curves between left shoes and right shoes would be

The correct answer: L-shaped.

These shoes are good only in pairs of one each. Additional left shoes alone do not make the consumer better off, and additional right shoes alone do not make the consumer better off. The indifference curves are therefore L-shaped.

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John derives utility from the consumption of food and clothing. His utility function can be represented as U =F*C. If John currently consumes 10 units of food and 8 units of clothing, how many units of food would John be willing to give up to get one more unit of clothing?

The correct answer: 1.25

MUC = F =10. MUF = C =8. MRS = 10/8 = 1.25.

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Suppose Tim enjoys coffee (C) but is sickened by tea (T). Which of the following utility functions would best represent Tim's utility function for coffee and tea?

The correct answer: U = C / T

For this function, additional units of tea make Tim better off.

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